Currently in Canada, taxes payable at death are payable pursuant to the Income Tax Act(and do not include succession duties which were in force prior to 1971). Two or more taxpayers are created in the year of death because a tax return must be filed for the terminal year, and a second or more tax returns must be filed for each of the testamentary trust(s) in the estate. Numerous testamentary trusts can be created by a will, each treated as separate taxpayers, and each with beneficiaries and trustees specified by the testator in the will.
As a testamentary trust is taxed at graduated rates, there is a significant opportunity for tax savings through income splitting. Properly drafted, this mechanism can result in significant tax savings in the terminal year and for the duration of the existence of the additional testamentary trusts created by the will.
In addition to tax savings, another benefit of testamentary trusts is that they provide a means of creditor protection for the intended beneficiaries. As the assets inside a testamentary trust are beneficially but not legally owned by the beneficiary, they are less likely to be deemed to be a family asset under the Family Relations Act or attached by other creditors to satisfy debts owing by the beneficiary.